Wednesday, November 4, 2009

Economics Practice Question

On the Series 65 exam, you should expect to see at least three or four questions concerning economic indicators. Like this one:

Which of the following is/are generally associated with the economic phase known as "expansion"
A. falling CPI
B. falling interest rates
C. falling unemployment
D. all choices listed

EXPLANATION: during an expansion, everybody’s working, so unemployment is falling, decreasing, dropping, or whatever the exam wants to call it. The CPI and interest rates tend to rise during an expansion. In other words, stockholders tend to do better in an expansion while bond holders tend to do worse . . . and during a contraction, bondholders tend to do better, since falling interest rates raise the market price of their bonds, and since their fixed income stream has greater purchasing power if the CPI begins to drop (deflation).


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